Throughout their careers, many small business owners reinvest all surplus funds back into their business, intending to use the proceeds from its sale for retirement. This strategy can be highly beneficial, especially when leveraging the various small business capital gains tax (CGT) concessions available upon selling. These concessions not only significantly reduce your CGT liability but also enable larger contributions to your superannuation account.
Some small business CGT concessions allow eligible business owners to make substantial super contributions post-sale, bypassing the usual contribution limits.
Need to Know
The eligibility criteria for the government’s four small business CGT concessions are intricate. It is essential to obtain specialist tax advice to understand how the rules apply to your specific situation and to confirm your eligibility.
Additionally, there are strict rules regarding the order in which the four small CGT concessions can be applied, which can greatly affect your tax outcome. Always consult a licensed tax adviser before making any decisions or super contributions.
What Are the Small Business CGT Concessions?
There are four small business CGT concessions available:
- Small Business 15-Year Exemption (Subdivision 152-B of the Tax Act)
- Small Business 50% Reduction (Subdivision 152-C)
- Small Business Retirement Exemption (Subdivision 152-D)
- Small Business Rollover (Subdivision 152-E)
These concessions can be applied when you sell an active asset owned by your business at a profit, provided your annual turnover is under $2 million.
Each concession suits different situations. You can apply multiple CGT concessions to the capital gain from selling your assets if you qualify, thereby reducing your capital gain and the resulting CGT.
Of the four concessions, only two allow larger contributions to your retirement savings:
- Small Business 15-Year Exemption
- Small Business Retirement Exemption
How Does the 15-Year CGT Exemption Work?
The 15-year CGT exemption is the most advantageous of the four small business tax concessions and must be applied first to any capital gain from the sale of your business assets.
Under the 15-year CGT exemption:
- The entire capital gain accrued over the years is disregarded by the ATO.
- You do not need to offset any capital losses against the capital gain.
- The entire sale proceeds, up to the Lifetime CGT Cap (see below), can be contributed to your super account without counting towards the non-concessional contributions cap.
This exemption is an excellent way to avoid significant CGT on the accumulated capital gain from your business while boosting your super account as retirement approaches.
Case Study: How the 15-Year CGT Exemption Works
Ayumi, a conveyancing professional, has operated her business for 20 years and is considering retirement. At age 58, with an annual turnover below the $2 million threshold, Ayumi sells her business premises, realizing a capital gain of $600,000.
As she meets both the basic and additional conditions for the 15-year CGT exemption, her $600,000 capital gain is disregarded for CGT purposes, and her capital losses remain unaffected. Consequently, her taxable capital gain is $0.
Over the years, Ayumi has contributed very little to her super account. She decides to make a significant contribution from the sale proceeds of her business premises. Utilizing the super contribution rules for the 15-year CGT exemption, she contributes $600,000 to her super account and elects to exclude this contribution from the non-concessional contribution cap.
Am I Eligible for the Small Business 15-Year CGT Exemption?
Eligibility for the small business 15-year CGT exemption requires meeting specific criteria:
- Basic Conditions:
- You must have owned the business asset for at least 15 years.
- You must be 55 years or older and the sale must be in connection with your retirement.
- Additional Conditions:
- The asset must be an active asset used in the business.
- Your business must have an annual turnover of under $2 million.
For personalized advice and to determine your eligibility for the small business 15-year CGT exemption, consult with a licensed tax adviser.
For expert guidance on CGT concessions and to maximize your retirement savings, contact BOA & Co. Financial Group at 1300 952 286, email info@boanco.com.au, or visit our website at www.boanco.com.au.